Photographer: David Hogan/Getty Images

Seattle: Kurt Cobain, Coffee, Data Storage

The city is luring money and talent from Silicon Valley

When investors asked Kiran Bhageshpur whether his new tech startup meant he’d be moving back to Silicon Valley, he said no. Bhageshpur spent almost two decades in the Valley building business software before moving to Seattle, which he says has the ecosystem his latest venture needs. “This is the place with the upside,” he says, gazing at the Space Needle through his office window.

Bhageshpur’s year-old company, Igneous Systems, is among a wave of startups setting up shop in Seattle to grab a piece of the $36 billion global market for data storage, an industry that includes both the raw boxes of hard drives a business buys to store data and the software needed to manage it. Although companies such as Amazon.com have revolutionized storage by letting companies and individuals rent cloud capacity, private storage is selling faster than ever to businesses that don’t want to use another company’s computers. Venture funding for such startups has almost tripled in the last five years, to $1.6 billion, according to researcher CB Insights.

Chart: Storage Funding

California remains the primary home for storage companies, but Washington state is fast becoming a hub. “There’s a lot of storage IP and people with talent in the 206 area code,” says Daniel Ives, an analyst at FBR Capital Markets.

Much of that intellectual property is housed within Isilon Systems, where Bhageshpur was once a senior director of engineering. Founded in Seattle in 2001, Isilon made its name with software and hardware designed to store and retrieve files such as large audio and video clips. Since EMC, the world’s largest maker of storage hardware, bought the company for $2.3 billion in 2010, several Isilon executives have left to form rival startups, often with funding from Isilon co-founder and former Chief Executive Officer Sujal Patel, who departed in 2012. Storage companies based in the Valley are establishing offices in Seattle to attract industry specialists.

Patel has contributed funding to Bhageshpur’s company, Igneous, which has raised $26.6 million, and to Qumulo, founded by Peter Godman, Isilon’s former director of software engineering. Qumulo, which raised $40 million in February, says its first software product will differentiate itself by better identifying which files are used most often and which are slowing system performance. Most of Qumulo’s executives used to work at Isilon; its first 15 customers include Sportvision, the digital-effects shop that inserts yellow first-down lines into NFL broadcasts. Igneous hasn’t said publicly what kinds of storage products it plans to sell.

Isilon’s success is a bit of a cautionary tale for its offspring. Planning to start the company, Patel left the Seattle office of streaming-software maker RealNetworks in 2000 shortly after the dot-com bubble burst. But venture funding quickly dried up: Of almost 250 venture-backed storage companies founded at that time, fewer than a dozen were successful, he says, and some shut down without ever shipping a product. Most of the current crop of startups will likewise fail, Patel says. “Storage is a very hard thing to get right.”

The money pouring into storage is leading more entrants to a field that already includes well-financed stars. San Jose-based Nutanix, which sells software that can turn big clumps of servers into cohesive storage centers, has raised $312 million from investors since its 2009 founding. Pure Storage, founded the same year in Mountain View, Calif., sells high-capacity memory that can speed up time-consuming storage processes; it’s raised $470 million. Both companies opened offices in the Seattle area last year.

Isilon is part of the fastest-growing storage division at EMC, which declined to comment for this story. With hardware increasingly cheap and commoditized, storage startups like Qumulo that focus more on differentiating themselves through software have a chance to take business away from EMC and fellow giants NetApp, Hewlett-Packard, and Dell, says Ashish Nadkarni, an analyst for market researcher IDC. Ives, of FBR, says Wall Street is eager to invest in startups that seem able to outmaneuver the established companies. “The incumbents are in the right lane with their horse and buggy,” he says. “In the left lane, you have a lot of Priuses.”

The bottom line: Seattle is becoming a hub for the storage industry, which has seen venture funding triple, to $1.6 billion, in five years.

(Sixth paragraph updated to correct total funding for Pure Storage.)

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